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Retail sales (Sep): Dropping sharply after CARS ended

Mon, Oct 12 2009, 10:09 GMT
by BHF-Bank Economics Department

BHF-Bank

• Import prices and CPI (Sep): annual rates still in negative territory 

• First regional PMIs (Oct): indicating slower expansion in manufacturing 

• Industrial production (Sep): upward trend slowing markedly 

• UMI consumer sentiment (Oct prel.): decreasing slightly

Import prices had risen by 2.0% mom in August, mainly due to higher petroleum prices. As they fell slightly in the statistically relevant first third of the month, we forecast that import prices will have remained stable in September.

Retail sales went up by 2.7% mom in August, largely due to a sharp rise in auto sales triggered by the government’s CARS program. As this ended on 31 August, domestic vehicle sales plummeted by one third. Gasoline prices were also noticeably lower, but this will probably have been cancelled out by the seasonal adjustment factor and will thus not have dampened sales. All in all, we expect retail sales to have suffered a significant setback in September; they could have declined by about 2.3% mom. Retail sales less cars had also risen markedly by 1.1% mom in August, and we expect them to have remained stable at best in September.

According to the ISM inventory subindices, the downward trend in business inventories is likely to slow in the near future, but August business inventories could have fallen again by 1.0% mom. We already know that factory inventories went down by 0.8% mom, and wholesale inventories by as much as 1.3% mom. The depletion of retail inventories could also have been more pronounced due to CARS.

The FOMC minutes, although acknowledging that the US economy has begun to recover, could still state that economic activity was likely to remain weak for some time, partly due to ongoing job losses, lower wealth and tight credit. Thus the majority of the members will have still been convinced that economic conditions warrant exceptionally low levels of the fed funds rate for an extended period, with substantial resource slack leading to subdued inflation in the near future.
However, there will have been some discussion about the future path of monetary policy and the exit strategy: some of the members could have argued that policy needs to be tightened well before utilisation rates reach agreeable levels, depending on the development of inflation expectations. It should be noted that the FOMC minutes will include adjusted projections for economic growth, inflation and unemployment rates. We expect the projected growth rates to be revised upward, especially for 2010. Unemployment and inflation projections need not be altered significantly, affirming the expansive monetary policy stance.

Consumer prices jumped by 0.4% mom in August, because gasoline prices went up sharply. In September, gasoline prices fell, but this will be cancelled out almost entirely by the seasonal adjustment. New car prices, which had gone down because of the CARS rebates in August, could have corrected upward. But rents, and therefore owner’s equivalent rent, could have fallen somewhat due to the temporary boost in demand for houses related to a special tax credit expiring 1 December. All in all, we predict that consumer prices will have risen modestly by 0.2% mom (–1.4% yoy). Given high unemployment and low capacity utilisation rates, core CPI could have again increased by a mere 0.1% mom, leaving the yearly rate at 1.4%.

Both the New York Empire manufacturing and the Philadelphia Fed index improved sharply and indicated expansion for the second consecutive month in September. The government’s CARS programme, offering temporary support for car production, could have played a decisive role. Thus we predict that both indices will have fallen back somewhat in October, as the ISM manufacturing index already did in September. The New York Empire manufacturing index could have corrected downward from 18.9 to 17.0, which would be the average level during the growth period between 2002 and 2007. The Philadelphia Fed index could have declined from 14.1 to 12.0 in October, which would still be an acceptable level.

Industrial production had increased by 0.8% mom in August due to car production and utility output in particular. However, due to CARS ending, vehicle production could have fallen, and total industrial production will probably only have risen slightly, despite the ISM production component still being relatively high at 55.7. The labour market report revealed that aggregate manufacturing hours fell by 0.5% mom, and, according to industry data, utility production appears to have fallen again. We therefore expect industrial production to have gone up by a mere 0.1% mom in September. The capacity utilisation rate is likely to have risen again, albeit only slightly to 69.7%, which would still be more than ten points below the long-term average.

In September, the University of Michigan’s (UMI) consumer sentiment went up by almost 8 points to the highest level since the onset of the recession in early 2008.
Better economic data, especially from housing, and the rebound on the stock market could have been responsible for the improvement. However, the Conference Board’s indicator fell back, reflecting worse data from the labour market. As economic data have been more mixed recently, we forecast that UMI’s preliminary October consumer sentiment will have fallen by one point to 72.5.

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Published on  Mon, Oct 12 2009, 11:14 GMT